Tuesday, December 16, 2008

Stimulus Spending

In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa's Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a "lifestyle superpower." The country embarked on a great Keynesian experiment:

August 1992: 10.7 trillion yen ($85 billion). Japan passed its largest-ever stimulus package to that time, with 8.6 trillion yen earmarked for public works, 1.2 trillion to expand loan quotas for small- and medium-sized businesses and 900 billion for the Japan Development Bank. The package passed in December, but investment kept falling and unemployment rose. By the end of the year, Japan's debt-to-GDP ratio was 68.6%.

April 1993: 13.2 trillion yen...

September 1993: 6.2 trillion yen... The economy didn't respond. By the end of the year, Japan's debt-to-GDP reached 74.7%.

February 1994: 15.3 trillion yen...

September 1995: 14.2 trillion yen...

April 1998: 16.7 trillion yen...

November 1998: 23.9 trillion yen... By the end of the year, debt-to-GDP hit 114.3%.

November 1999: 18 trillion yen... Debt-to-GDP reached 128.3%.

Since 1992, U.S. debt-to-GDP has hovered around 40%. Meanwhile, Japan's grew from 60% to a high of 180% in 2006. Back in 1990, plenty of people thought that Japan would overtake the U.S. as the world's economic superpower. That's not a worry you hear much anymore.

The U.S. has a unique opportunity to reassert its strength and economic vitality by giving the economy tough love in the coming year. We also have the possibility of reverting to the patterns of the rest of the developed world, the folks who have had 10% unemployment and massive public debts since the end of the Marshall Plan.